20476
VAT — registration — refusal by Commissioners to register company claiming to intend to deal in surplus NHS medical products — whether decision reasonable — on facts decision reasonable — appeal dismissed
MANCHESTER TRIBUNAL CENTRE
GLOBAL MASTER LTD Appellant
- and -
THE COMMISSIONERS FOR
HER MAJESTY'S REVENUE AND CUSTOMS Respondents
Tribunal: David Demack
Jon Denny
Sitting in public in Manchester on 19 October 2007
The Appellant was not represented
James Puzey, counsel, instructed by the Solicitor and General Counsel for HM Revenue and Customs for the Respondents
© CROWN COPYRIGHT 2007
DECISION
- The appellant company, Global Master Ltd ("GM"), appeals against a decision by letter of 21 December 2006 in which Her Majesty's Commissioners for Revenue and Customs ("the Commissioners") refused to register it for VAT purposes. The Commissioners gave their reason for refusal as:
"We are unable to proceed with your VAT registration application because the evidence presented does not indicate that a business is currently present and is insufficient to demonstrate an intention to trade."
- By notice of 4 January 2007 GM appealed the decision on the following grounds:
"1. The Commissioners Decision dated 26 December 2006 not to proceed with the Appellant's application to register for VAT is wrong in fact and law.
- At all material times, the Appellant was a UK registered company retaining the intention to make taxable supplies.
- The Commissioners have failed to give reasonable and proportionate consideration to the Appellant's intention to make taxable supplies with reference to its entitlement to be registered under the Value Added Tax Act 1994 ("VATA"), in particular Schedule 1, paragraphs 9 and 10, of the VATA.
- The Appellant has provided documentary and verbal evidence to the Commissioners of the Appellant's "carrying on a business" and its ongoing intention to make taxable supplies in the course or furtherance of that business under the VATA.
- The failure to register the Appellant's VAT Registration is in breach of the fundamental European Community Law principles of legal certainty and legitimate expectations, or is manifestly oppressive.
- Liberty to amend these Grounds of Appeal may be sought once the legal and factual basis for the Commissioners' case against the Appellant is known."
- The legal provisions relevant to an application to register for VAT made by an intending trader to be found in paragraphs 9 and 10 of Schedule 1 to VATA are in the following terms:
"9(1) Where a person who is not liable to be registered under this Act and is not already so registered satisfies the Commissioners that he –
(a) makes taxable supplies, or
(b) is carrying on a business and intends to make such supplies in the course or furtherance of that business,
they shall if he so requests, register him with effect from the day on which the request is made or from such earlier date as may be agreed between them and him."
10(1) Where a person who is not liable to be registered under this Act and is not already so registered satisfies the Commissioners that he –
(c) makes supplies within sub paragraph (2) below, or
(d) is carrying on a business and intends to make such supplies in the course or furtherance of that business
and (in either case) is within sub paragraph (3) below, they shall if he so requests, register him with effect from the day on which the request is made or from such earlier date as may be agreed between them and him."
- A person seeking registration under one of the above sections must satisfy the Commissioners either that he is making taxable supplies or that he is carrying on a business and intends to make taxable supplies. In the instant case, it is common ground that GM has not made any taxable supplies. The issue thus revolves around paragraph 9(1)(b) or paragraph 10(1)(b) of Schedule 1.
- When the appeal was called on for hearing GM was not represented. We knew of no reason for its non-representation, and therefore acceded to an application by Mr James Puzey, counsel for the Commissioners, to proceed under rule 26(2) of the VAT Tribunals Rules 1986, as amended, that is in GM's absence.
- We did, however, have in the bundle of papers before us a 23 page statement by Miss Deborah Field, the sole director of GM, and GM's Form VAT1. In that Form GM disclosed its intended business activities as "general export excluding mobile phones and related products", that Miss Field was a director of Eyedial Ltd ("Eyedial") and that the estimated value of the company's taxable supplies in the next 12 months was £20 million. As an exporter, GM sought permission to make monthly VAT returns: it would be a repayment trader.
- In her statement, Miss Field disclosed that Eyedial made wholesale supplies of mobile phones and commenced business in 2003. She said that she was aware of the problems associated with the trade in mobile phones, but had never been involved in any transaction which to her knowledge had been tainted by fraud, and indeed claimed to have taken every possible step to avoid it.
- She explained that GM had been formed on 2 May 2006 with herself as director, and her father, Clifford Joseph Field, as company secretary. She added that its intended main business activity was the "sale of medical supplies such as bandages, catheters and HIV testing kits". Her father, who prior to retirement had worked in the pharmaceutical industry, had passed on his knowledge and provided her with contacts within the industry. Miss Field gave as a principal reason for setting up GM her wish to trade in medical supplies through a company other than Eyedial. She said she was aware that some companies dealing in mobile phones had traded in other products under the umbrella of the one VAT registration number, but did not propose to follow their example as she wished to show that she had nothing to hide about her dealings in medical supplies.
- The medical supplies in which GM intended to trade were described by Miss Field as consisting of stock surplus to NHS needs but which fell within the manufacturer's guarantee. She maintained that such trading was possible as the NHS disposed of stock three years old, whereas the guarantees extended to five years. Miss Field disclosed that GM did not intend to purchase surplus stock direct from the NHS but rather from Aktec Ltd ("Aktec") and Portal Trade Ltd ("Portal Trade"); and as an example of a proposed customer, put forward Noor Jahan General Trading LLC of Dubai ("Noor Jahan").
- We should mention at this point that both Aktec and Portal Trade were formed in 2005, and both had what the Commissioners described as "an MTIC user interest set". Further, the Commissioners were aware that medical supplies were becoming "a new MTIC commodity with the strong possibility of tax risk". The Commissioners were also aware that Noor Jahan was a customer of Aktec and Portal Trade. Portal Trade held an account at First Curacao International Bank NV – a bank which the Dutch authorities have since closed due to its involvement with companies found to have been involved in MTIC fraud. We should also mention that the Commissioners' own enquiries showed that neither Aktec nor Portal Trade had filed any accounts at Companies House, and a director of Portal Trade had informed them that it intended to cease wholesale trading and merely retail children's clothing.
- Miss Field set out a number of steps GM had taken to show an intention to trade. They included the provision of premises (by sublet from Eyedial) and telephones, applying for registration for corporation tax, opening bank accounts, and appointing an accountant. Although admitting that GM had no employees, Miss Field explained that it "envisaged" a Ms McGarrell, a former manager / trainer for Glaxo SmithKline, working for the company. Miss Field claimed to have carried out market research and some marketing work for the company, but admitted that GM had not prepared a business plan, cash flow forecast or budget.
- In meetings held between GM and representatives of the Commissioners, Miss Field was asked about GM's start-up capital, and initially replied that Eyedial would be providing between £30,000 and £40,000. Subsequently, on the Commissioners refusing to meet an input tax claim by Eyedial, Miss Field claimed that her father would be providing an undisclosed amount of start-up capital. She added that there were certain deals where capital would not be needed. If goods were held in a bonded warehouse and "back to back" deals were entered into leading to the transfer of goods "they would be subject to checks being carried [out] on bonded warehouses and checks on the goods when they leave". The goods would not be released by GM until payment for them had been made, and freight would then become the new owner's responsibility. Goods would be held by AFI (Logistics) Ltd ("AFI"), a freight forwarder, with which Eyedial dealt. Miss Field said that she had found AFI to be "very reliable". (We were informed by the Commissioners, and accept, that AFI was deregistered as a missing trader on 16 February 2007, and had been assessed to tax of £63,580 for period 09/06). Although also asked about the documentary evidence of export, Miss Field simply replied that she was "experienced in this sort of export through my father's business and knew the requirements necessary".
- As further evidence of GM's intention to trade, Miss Field disclosed correspondence with its intended suppliers and customers and the due diligence checks on those persons she claimed to have already carried out, including checks at Companies House and on telephone numbers.
- On 22 June 2006, the case officer Mr Armstrong wrote to GM saying, inter alia:
"I am writing to you following my recent visit in connection with your application for Vat registration for the above company.
At that time you provided me with details of prospective customers and suppliers and a list of the pharmaceutical items that you intended to trade in.
I am aware from the many conversations I have had with you that you are keen for this new company to be seen as "having a clean sheet" with HMRC and you wish to move away from being involved in the Missing trader Intra Community Fraud (MTIC) sector. You have stressed to me that you have no intention of trading in MTIC related goods like mobile phones with this new company and have even drawn up written documents stating this.
At the visit I told you that I had very little knowledge regarding the goods that you intended to trade in, but would research them on my return to the office this week.
I have now had a chance to do some research on these products on the departmental computer systems and this has given rise to grave concerns on my part. I have found the exact products shown on your list being traded by traders known to be actively involved in the MTIC trade sector. I have traced some of these deal chains and found defaulting traders in them giving rise to tax losses to HMRC.
It is my view that these products are being introduced into MTIC deal chains as they are not specified goods and will not be affected by upcoming changes in the law.
I feel that it is only correct that I inform you of my concerns about trading in these goods before you commence trading, bearing in mind how adamant you are about this company not being involved in the MTIC trade sector.
I strongly advise you to discuss the contents of this letter with your advisors."
- GM having, in the Commissioners' view, failed to address the points raised in the letter, its application for registration was later refused. Miss Field maintained that the decision "was not due to the merits of its own application, but because of the company's association with Eyedial, and Eyedial's involvement in the trade of mobile phones".
- Asked about public liability insurance, Miss Field claimed that GM would obtain the necessary policy "as soon as trading was commenced but that this was not needed at the moment as the company did not have any employees". As to product liability insurance, she maintained that it "was only needed when goods were being transported and therefore that the responsibility would not fall on GM during that time".
- Miss Field summarised the steps she claimed GM had taken to "secure the business" as follows:
"1. contacted suppliers and customers
- undertaken research into the market
- set up banking facilities
- set up an office and phone line and recruited future staff
- set up a computer system
- established a full record keeping system, both on the computer system and with hard copies"
- On 6 December 2006, Mr Lavery, the case officer, prepared a report on GM's registration application and concluded that it had not "discharged its obligation to show that a business earnestly pursued exists, nor that it ever will make supplies". Miss Field commented on that finding, saying:
"I was not aware of any allegation that my potential supplier, Portal Trade, had never actually traded in HIV testing kits or I would never have become involved with them. I am not aware of any evidence, allegedly in the possession of the Commissioners, that the two suppliers, Portal Trade and Aktek have been involved in chains including tax losses and trace back to acquisitions from other member states, rather than the NHS. I contacted these suppliers in good faith and believed that they would be supplying me with ex-NHS stock. Although I did perform initial checks on both companies, such as Companies House searches and VAT Registration confirmation as attached, I would like to stress that I would have done further extensive due diligence on each supplier and customer before commencing actual trading with them, and that I have already created due diligence packs for this purpose with the assistance of Mr Armstrong from HMRC when I started trading with Eyedial. In the June meeting, Mr Armstrong told Mr Hunton and myself that if we carried out the same due diligence procedures and paperwork as those used for Eyedial then that would be acceptable."
- Although Miss Field claimed that GM had registered for corporation tax, she had to admit that Mr Lavery had recommended that registration should be conditional, particularly on the inclusion of a quarterly stagger and an early visit by an allocated officer. She considered the conditions recommended acceptable to GM.
- Mr Puzey maintained that, in arriving at his conclusion not to register GM for VAT, Mr Lavery had taken into account the following relevant matters in support of the application:
"... Agreement with Eyedial Ltd, the sister company of Global Master Limited for the use of the premises and the employees of Eyedial Ltd.
? Opening a Bank Account.
? The purchase of a separate phone line.
? The creation of a computer based accounts system and separate files to hold the documents.
? The appointment of Hunton and Co Accountants.
? Registered the company of HMRC for Corporation Tax.
? Research into the sector into which the company was proposing to enter.
? Contact with proposed Suppliers and Customers.
- Mr Puzey added that Mr Lavery had also taken into account a number of contrary indicators which weighed against the granting of the application. Those indicators may be summarised in the following way:
(a) GM had no capital, but maintained that Mr Field, Miss Field's father, would provide it on the company being registered for VAT
(b) It had no insurance cover of a general nature and specifically no cover for the goods in which it intended to trade.
(c) GM had not advertised its services or the goods in which it intended to trade. It claimed advertising to be unnecessary as it did not know what goods could be available for purchase until it visited its suppliers warehouse.
(d) The company's registration with the Commissioners for corporation tax was incomplete in that it had made no declaration of an intention to trade: companies were required to make such a declaration within three months of starting to trade and HMRC had not, received such a declaration from GM.
(e) Miss Field had presented no evidence or carried out any research into the wholesale market for medical supplies, but had merely stated that GM would be buying from preferred purchasers of surplus NHS stock.
(f) GM had produced only general introductions to Portal Trade and Aktec. The director of Portal Trade had disclosed that it was withdrawing from wholesaling and was seeking a shop from which it could retail children's clothes. Both Portal Trade and Aktec had only been incorporated in 2005: neither had filed any accounts at Companies House: both had been involved in chains of transactions in which there had been missing traders.
(g) The only potential customer of GM whose name had been disclosed was Noor Jahan. That company were involved in trading transactions with Portal Trade which were either cancelled or related to non-existent HIV testing kits. (We find that as an additional fact).
(h) Mr Hunton, GM's accountant, disclosed that the company might not commence trading on being registered for VAT. Mr Lavery construed that disclosure as an indication that GM did not have a firm intention to trade.
(i) GM's only expenditure had been of an incidental nature.
- Mr Puzey submitted that it was plain that Mr Lavery had taken account of all relevant matters in determining that GM should not be registered for VAT. The matters of lack of finance, insurance and advertising were all relevant considerations as to whether a business was being carried on, and as to GM's intention. Even allowing for a broad construction of the expression "carrying on a business", the deficiencies noted by Mr Lavery were significant. It was also relevant that GM made no real advance in preparation for business between June 2006 when it was visited by an officer and December 2006 when Mr Lavery took over the conduct of GM's affairs.
- Mr Puzey particularly noted that although Miss Field professed to have a good knowledge and experience of the medical supplies business, she had disclosed only two businesses as potential suppliers to GM, one of which, Portal Trade, had disclosed on 4 September 2006 having no intention to continue wholesaling goods but rather intended to retail children's clothing. Coupled with that were the facts that Portal Trade had filed no accounts, and banked with First Curacao International Bank NV.
- GM's other potential supplier, Aktec, was incorporated in August 2005. It too had filed no accounts and its letter of introduction made no reference to its supplying medical supplies, but rather to its dealing in computer and communications equipment. And in so far as Noor Jahan was concerned, it was unclear why it would seek to purchase supplies from GM when it already had trading links with Portal Trade and Aktec. Mr Puzey further reminded us that AFI, the freightforwarder used by Eyedial and intended to be used by GM, had been deregistered as a missing trader and had been assessed to outstanding VAT.
- Mr Puzey concluded his submissions by observing that the burden of proving that the decision under appeal was an unreasonable one fell on GM. It had put forward no evidence to call into question the Commissioners' original decision to refuse registration: GM was still not trading; it was not carrying on any business. The matters relied on by GM were at best evidence of preparations to carry on a business, but were far from complete: the business described by GM did not exist in any meaningful sense. The totality of the evidence was properly considered by the Commissioners in reaching their decision not to register GM, and that decision was a reasonable one.
- We accept the Commissioners' case in its entirety, and find it unnecessary to make any observations of our own upon it. We dismiss GM's appeal, and direct GM to pay the Commissioners' costs of the appeal calculated on the standard basis. If the costs cannot be agreed, we direct that they be assessed by a chairman of the tribunal sitting alone.
DAVID DEMACK
CHAIRMAN
Release Date: 13 November 2007
MAN/07/0209
